Wind turbines manufactured by Vestas Wind Systems stand at the Ardrossan windfarm, operated by Infinis Energy Plc, a unit of Terra Firma Capital Partners

A loophole in a popular subsidy scheme for small wind power projects is boosting the spread of bigger turbines and could end up costing energy consumers more than £400m, it has been claimed.

The feed-in tariff scheme that began operating in 2010 is designed to encourage smaller wind projects at places such as farms or businesses that can have as few as one or two turbines.

It pays out nearly twice as much for a turbine capable of generating up to 500 kilowatts of electricity than for a machine that can pump out more than that amount.

But according to a study by the Institute for Public Policy Research think-tank, which the energy department has questioned, the capacity rating of each turbine only needs to be declared by the installer of the machines, based on information from the manufacturer, and the subsidy scheme is poorly monitored.

That means developers can install larger turbines — which are more efficient in less windy areas — with smaller generators than would normally go into a machine of that size, in order to get the higher subsidy payments.

The practice is known as derating and is legal, but critics have long charged that it means that developers are able to put in bigger turbines and get a better rate of return than originally intended.

Some derated projects are getting as much as a 25 per cent rate of return when the feed in tariff scheme was only supposed to ensure a return of about 5-8 per cent, according to the IPPR.

“Ministers should act immediately to close down what is becoming a ‘feed-in frenzy’,” said one of the report’s authors, Joss Garman. “It is distorting the energy market, lining the pockets of investors and undermining public confidence in Britain’s vital clean energy sector.”

The energy department said it was aware of the issue and was already investigating it, but disputed some of the report’s findings, including the claim that it could cost energy users more than £400m.

“This report is based on incorrect and second-hand information — the numbers just don’t add up,” the energy department said.

“We keep this issue under constant review to make sure consumers are getting the best possible deal, and an in-depth investigation is currently under way. We will take any action necessary if wind developers are found to be unfairly exploiting the FiTs scheme.”

Because the overall amount of subsidies is capped, the developers taking advantage of the loophole are denying support to other clean energy projects, the IPPR report claims.

“Another impact of this design flaw in the feed-in tariff is that wind turbines are being erected that are much larger than they need to be, and perhaps larger than host communities are expecting,” the report says.

“The resulting impact on the landscape may well be exacerbating local opposition to new wind projects.”

Regulators have been warned about the practice since at least 2012, but have failed to take sufficient action according to the IPPR, which estimates each derated turbine gets about £100,000 in “excessive” subsidy payments each year.

That could add up to more than £400m over the 20 years that subsidies can be paid, it says.

According to Freedom of Information data the institute obtained, 103 wind turbines have been derated between the time the feed in tariff scheme began in 2010 and September last year.

But that figure suggests the practice of derating is not widespread, according to RenewableUK, the wind industry trade body.

“We’re talking here about 103 operational turbines at the most,” said Maf Smith, RenewableUK’s deputy chief executive. “That’s less than 1 per cent of the 12,000 small, medium and large-scale onshore wind turbines generating in the UK.”

Mr Smith said derating was also a complex issue and in some cases it might be necessary because of limits in the capacity of the grid to cope with the amount of electricity being generated, or because a site where the wind is lower needed a turbine with longer blades to make the best use of it.

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